Evaluating Causes, Cures and Global Imbalances
1. The essence of the problem THE PUZZLING DEFICIT The US current account deﬁcit is undoubtedly one of the most signiﬁcant, and at the same time puzzling, events of our age. The magnitude and signiﬁcance of the US deﬁcit seems clear. Figure 1.1 shows that from a situation of near zero in 1991, the US current account deﬁcit in 2006 had grown to $811 billion, or 6.1 per cent of GDP, an unprecedentedly high level. It dominates global ﬁnancial ﬂows, with the world’s largest economy buying imports and other services from abroad far in excess of its exports, and ﬁnancing the diﬀerence using funds borrowed from the rest of the world, including some of the poorest countries – a ﬂow of capital described as ‘fundamentally perverse’ (Cline, 2005b, p. 2). Moreover, according to some experts the imbalance is set to widen. Forecasts by various commentators are that, with unchanged policies and exchange rates, the US current account deﬁcit will continue to grow and range between 8–12 per cent of GDP by 2010 (Mann, 2004; Roubini and Setser, 2005; Truman, 2005). Obstfeld and Rogoﬀ (2005) regard the US deﬁcit ‘as a sword of Damocles hanging over the global economy’. 100 –100 –300 –500 –700 –900 1980 1 0 –1 –2 –3 –4 –5 –6 –7 1985 1990 1995 2000 2005 US current account balance, $ billion US current account balance, as a % of GDP (RHS) Sources: BEA; authors’ calculations; Reuters Ecowin Pro. Figure...
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